Profiling the White Collar Criminal

Presented by:Craig L. Greene, CPA/CFF,

CFE, MCJOf

McGovern & Greene LLP

White Collar Crime• One example is fraud

by people in positions of trust.

• In this session we are going to focus on the occupational fraudster.

Profiling• Approach to

classifying offenders for the purpose of explaining their behavior and assisting in the investigation of crime.

ACFE STUDY – WHO COMMITS FRAUD?

2010 ACFE Report to the Nations

• Organizations lose approximately 5% of their annual revenues to employee fraud, waste and abuse.

• $2.9 Trillion in fraud losses globally. • The median loss in this study was

$160,000. • Frauds lasted a median of 18 months

before being detected.

What Sort of Person Commits Fraud?

• Someone with a shifty appearance?• In need of a shave & haircut?• Black shirt, white tie?• Sneering glare?• Low cut blouse, too much makeup, big hair?• Fraud perpetrators tend to be the least

suspected.

Perpetrators• More authority = greater access to

resources & ability to override controls.• More trust = autonomy & authority…and

opportunity.• More frauds are committed by employees

and managers than owners/executives.• The size of the losses increases directly

with authority of the perpetrator’s position.

Perpetrators

Owner/Executive Fraud:

$834,000 median loss

3x Manager Fraud:

$150,000 median loss

9x Employee Fraud: $70,000

median loss

Perpetrators• Frauds committed by higher level

perpetrators also took longer to detect:

Perpetrators• Tenure of perpetrator has no strong

correlation– 49% was with the Victim Co. < 5 Years– 51% was with the Victim Co. > 5 Years

• Only 7% of fraud perpetrators had been previously convicted of a fraud-related offense.

Perpetrators• 57% of frauds in the U.S. were

committed by males.• The median loss caused by male

perpetrators ($167,000) was more than twice as much as the median loss caused by female perpetrators ($82,000).

Perpetrators• Age Factors:

– More than 1/2 of frauds are committed by individuals over 40.

– 1/3 of frauds are committed by individuals between 41-50.

Perpetrators• Educational Levels:

– 14% had post-graduate education.– More than 50% attended or graduated from college.– 39% were high school graduates with no college.

•The higher the education, the higher the loss:

High School$100K

College Degree$234K

Some College$136K

Post-graduate$300K

PerpetratorsDepartment Percent

of CasesMost Likely Fraud Scheme

Accounting 24.3% Check tampering*

Operations 20.7% Corruption

Executive/Upper Management 13.9% Corruption

Sales 13.1% Corruption

Customer Service 8.4% Corruption

Internal Audit 0.2% Corruption

*In Accounting, Corruption was 8th at only 10.4% versus Check Tampering at 33.2% of cases.

Perpetrators• Living beyond their apparent means

– 45% of the cases.• Experiencing financial difficulties at

the time of the fraud – 45%.

CRIMINOLOGISTS’ LITERATURE SURVEYS

A Profile of Serious Fraud Offenders

• They achieve their deception using false documents and fictitious identities.

• They are overwhelmingly male

• They are of high education status

• They are of a mature age.

• They are married/de facto

• They have no prior criminal record but a minority are serial fraud offenders.

• They are first convicted when of a mature age

A Profile of Serious Fraud Offenders

• They occupy positions of financial trust such as director, accountant, etc.

• They have a professional relationship with the victim.

• They are specialist offenders

• They act alone in committing the offense.

• They victimize two or more individuals

• Because of their socialization into some aspects of corporate culture there is often an absence of constraints on their behavior

A Profile of Serious Fraud Offenders

• They exhibit over-sensitivity to monetary gain.

• They are able to rationalize their misbehavior, neutralize guilt and thus justify crimes to themselves.

• They defraud because of a serious financial problem often due to gambling.

• A significant proportion dispose of the proceeds of their crime by buying luxury goods and services.

Personality Attributes• Need for

Control• Bullying• Charisma• Fear of Falling

or Failing

• Company Ambition

• Lack of Integrity

• Narcissism• Lack of Social

Conscience.

WHY DO THEY DO IT?

Differential Association Theory

• “The hypothesis of differential association is that criminal behavior is learned in association with those who define such behavior favorably and in isolation from those who define it unfavorably, and that a person in an appropriate situation engages in such criminal behavior if, and only if, the weight of the favorable definitions exceeds the weight of the unfavorable definitions.”

Opportunity Theory• American Society in its culture

contains a set of generally widely accepted social Goals, what has been referred to as "The American Dream".

• Individuals and groups who are unable or unwilling to pursue the legitimate means because opportunities are blocked or made difficult for their use.

The Rationalization Variable

• A "non-sharable" financial problem must exist.

• Individuals and groups must have knowledge necessary to commit the embezzlement.

• Suitable rationalizations for such behaviors must be available to actors.

Cressey’s Hypothesis: The Fraud Triangle

The Fraud Scale

HighFraud

LowFraud

High

High

High Low

Low

Low

PERSONAL INTEGRITY

OPPORTUNITIES TO COMMIT

SITUATIONAL PRESSURES

Social-Psychological Theory• Variables such as individuals' histories,

personal biographies, early family environments, peer relationships, significant others, etc.

• Criminologists and sociologists point out the important fact that the degree and quality of socialization is very much dependent on "bonding", the degree to which individuals are attached to agents of socialization.

What to Look For?• Unexplainable Wealth• Refusal to Take Promotions• Refusal to Take Time Off• Unusual Hours and/or Taking on Additional

Work• Doing Jobs Below Their Position or Taking

on Other’s Responsibilities• Addictive Behaviors – Alcohol, Drugs,

Gambling

CASE STORY – ILLUSTRATE THE POINTS

Ben The Tax Accountant• Ben was a Tax Accountant for a

Subsidiary of a $7 Billion Corporation.• Ben had been with the Company for over

28 years – Holding the Same Position After 18 Months with the Company.

• In October 2000 the Company’s General Manager Received a Call from the Company’s Bank’s Fraud Unit.

Discovery• The Caller Told the General Manager

that over the Past Several Months the Unit had been Tracking Some Unusual Deposit Activity.

• Company Checks Payable to the Bank in the Amount of $7,500 were being Deposited into an Account in the Name of Emily’s Boutique Store in Long Grove

Discovery• The General Manager Knew that

Emily was in fact Ben’s Wife.• He then Proceeded to Call Ben to his

Office, Wherein he Accused Ben of Theft of Company Funds.

• During his Interrogation he discovered…

Discovery• The Company Discovered that

Checks Presumably used to Pay a Diesel Fuel Tax was Being Diverted to Ben.

• An Examination of the Transactions Revealed that the Company’s Checks had been Previously Deposited into the Company’s C.O.D. Account.

Ben’s SchemeAs Prepared by Accounting

Change As Prepared by Ben

Cash $ 2,874.00

$ (2,800.00)

$ 74.00

CLG Const. 3,200.00

(3,200.00)

B&M Concrete 1,000.00

(1,000.00)

Woods Contractors 4,650.00

4,650.00

US Construction 500.00

(500.00)

James Builders 2,750.00

2,750.00

Kyle’s Konkrete 1,380.00

1,380.00

Company Check 7,500.00

7,500.00

Total $16,354.00

$ 0.00

$16,354.00

Profile Traits of Ben• Unexplainable Wealth• Few Days Taken Off for Sick or

Vacation Time• Refusal to Take a Promotion• Unusual Hours• Unusual Story Explaining his

Circumstances

Craig L. Greene, CPA/CFF, CFE, MCJMcGovern & Greene LLP

200 W. Jackson Blvd., Ste. 2325Chicago, Illinois 60606312.692.1000 x202

craig.greene@mcgoverngreene.com

Questions?